Can Anything Save MGM Mirage?

Will the CityCenter extravaganza help the gaming company conquer debt?

Editor's note: Contrary to reporting in a previous version of this article, Kirk Kerkorian stake in MGM Mirage stands at nearly 40%. The Fool regrets the error.

It seems almost tragic -- in the true literary sense -- to see once-great Vegas warrior MGM Mirage(NYSE:MGM) reduced to a groveling mess at the feet of its lenders because of prerecession overreaching.

MGM Mirage could be called the titan of the Las Vegas Strip. The company owns some of the most recognized properties on The Strip, including the iconic Bellagio, MGM Grand Las Vegas, Mandalay Bay, The Mirage, Luxor, and New York - New York. The company also owns -- wholly and through partnerships -- properties outside of Vegas such as MGM Grand Detroit, MGM Grand Macau, and Borgata.

Vegas competitors like Wynn(NASDAQ:WYNN) and Las Vegas Sands(NYSE:LVS) aren't having a terribly peachy time either; nor are operators like Ameristar(NASDAQ:ASCA), which don't have a Strip foothold. But none seems to have the Reaper hunting it down the way MGM does.

And yet, on the horizon there stands a great hope for MGM, and it goes by the name of CityCenter. The project is massive and will include nearly 5,000 hotel rooms, 150,000 square feet of gaming space, 425,000 square feet of retail space, 2,400 luxury condos. Heck, it'll even have its own power station!

But will it be enough to save MGM?

In short: noNot the answer you were hoping for? Well, not all that long ago, odds on CityCenter even being completed were long.

Dubai World, MGM's partner on the project, was angry at cost overruns, and a tough economy and deteriorating results at MGM made lender confidence seem unlikely. But some fancy footwork at the last minute gave MGM wiggle room with its debt covenants and allowed it to continue making capital contributions to CityCenter. Now, a late-2009 CityCenter opening seems like something we can bet on.

However, even that relatively near-term opening will likely be too late to make a huge impact on MGM's survival. The seven months between now and the ribbon-cutting will be grueling for MGM. It doesn't seem likely that the economy will turn on a dime and cause consumers to suddenly want to celebrate with a Vegas vacation. At the same time, even though the company continues to make moves to deal with its debt, those obligations still loom ominously.

And CityCenter will need time to ramp up to full steam, and that's time that MGM can't spare.

But all's not lostAlthough CityCenter may not end up playing Police Chief Brody to MGM's Amity Island, the company may have a better hero fighting off the big shark -- a scrappy, dedicated group working on its behalf.

Fool co-founder Tom Gardner has always been a big proponent of finding companies run by folks who have a large ownership stake, and I can only imagine that Kirk Kerkorian -- who, despite a recent dilutive stock offering, still owns almost 40% of MGM through his investment vehicle Tracinda -- has had a major role in pushing for leniency from lenders including Bank of America(NYSE:BAC), renewing the relationship with Dubai World, and getting a $2.5 billion debt and equity issuance. Of course, since MGM is also Kerkorian's baby, it's likely that there's even more at stake for him than money.

And while all of that will help, the work is not done yet. The economy is rotten and competition is cutthroat on The Strip. CityCenter could end up cannibalizing some of MGM's other properties. And that's not to mention other major projects nearing completion, such as the Cosmopolitan and Fontainebleau.

Kerkorian and MGM's management team still have to try and service a massive debt load with deteriorating financials. Potential buyers such as Boyd Gaming(NYSE:BYD) and Penn National(NASDAQ:PENN) are out there if MGM decides to sell off more of its properties, and it appears that the debt and equity markets are open, at least to some extent, to the company.

Taking either route would likely be painful to shareholders due to lost income streams, high interest rates, and dilution, but not nearly as painful as bankruptcy.

And if they do succeed ...While I'm coming around to MGM as its backers fight hard against death by debt covenants, the situation remains pretty touch-and-go. The real possibility that remains of MGM going bankrupt still makes it one of my least favorite companies in the gaming sector.

However, for those willing to take the risk, MGM's stock does provide the potential for huge upside. Stacking the size and amenities at CityCenter against hotels like Wynn and the Venetian suggests that it could be a serious gem of an asset for MGM once it hits its stride -- even though MGM will own only 50%. And that's in addition to the great collection of properties the company already owns.

So while I'd have trouble recommending MGM's stock to anyone except the most risk-tolerant, I sure am enjoying watching the company's management team work magic to keep the company afloat.